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March 17, 2014

5 Key Traits of Fastest Growing Bank Wealth Managers

Fidelity Investments study finds size is not the chief determinant of a bank’s success

After spending several years focused primarily on compliance and cost management, many banks are repositioning for growth and looking toward new revenue opportunities, particularly from fee-based businesses such as wealth management, according to a new study.

Fifty-five percent of bank executives who participated in Fidelity Investments’ Bank Wealth Management Study, released Wednesday, expected the revenue contribution from their wealth management practices to grow by 25% or more in the next five years.

The study identified a group of what it called “pacesetters,” whose wealth management typically represented about 35% of total bank revenue in the next five years, versus 20% for other banks.

“While some may assume that pacesetters were the largest banks or clustered in certain regions, our study found that what really set these firms apart was how they run their wealth management practices,” Mike Norton, head of the banking segment for Fidelity Institutional, said in a statement.

“Pacesetters recognize that wealth management not only offers significant revenue-generating potential for banks, it also presents an important client engagement and retention opportunity.”

Market Strategies International, an independent firm not affiliated with Fidelity, conducted the research in two phases in mid-October to early November: a qualitative phase comprising 12 in-depth phone interviews (blind; Fidelity not named); and a quantitative phase that involved 132 brief online/phone interviews (blind), where completes were weighted by total bank assets to ensure the findings were representative and projectable to the universe of U.S. large to midsize banks.

Five key traits distinguished the pacesetters, the study found. It also described five challenges these had to overcome for continued success:

5 Key Traits of Pacesetting Firms

Fidelity said that while pacesetting firms held nearly twice the assets of other banks ($6 billion versus $3.3 billion), their size and structure closely mirrored all banks in the survey, indicating that size of bank was not the greatest determinant of success.

Rather, five key traits set Pacesetters apart:

1. Leadership commitment and a continued focus on wealth management

Senior executives at Pacesetters typically were highly focused on the wealth management business, and committed to growing and developing it. Not an easy task, as one interviewee noted: “I see a challenge in banking, structuring ourselves and ensuring the senior leadership has enough autonomy to be entrepreneurial and run their line of business.”

2.Integration, not competition, with other bank lines of business

Twenty-six percent of all bankers said they competed somewhat for client assets with other parts of their banks. However, only 16% of pacesetters said so, compared with 35% of other banks. Integration was key, respondents said. “[Clients] don’t feel they’ve got a relationship with a commercial bank and then a separate relationship with wealth,” one study participant said. “It’s one wallet from the client’s perspective.”

3.Comprehensive wealth management service offerings

Many respondents defined wealth management as a holistic relationship that went beyond deposits and lending — all wrapped together with a high level of service. “It’s the bringing together of all of our capabilities to help clients build, maintain, protect and transfer wealth,” one banker said. The study found that pacesetters were more successful in executing on this philosophy, and focused less on products that might be considered more commoditized, such as insurance and annuities.

4.Leveraging the RIA approach

Respondents did not consider standalone RIAs as a significant competitive threat for wealth management practices at their banks, but 83% of pacesetters said they were using RIAs as part of the delivery model. One interviewee elaborated: “The RIA model, I think…will be increasingly popular … Part of that is fee-based. Part of that is a little bit more perception.”

5.Outsourcing noncore back-office operations

Bankers in the survey thought they could outsource most of the functionality in their back office. The study showed that Pacesetters apeared to have experienced more success than other banks with outsourcing noncore operations and increasing advisor productivity.

5 Challenges to Overcome

Even though banks’ wealth management practices are doing many things right, pacesetters surveyed felt they needed to continue to hone their wealth management practices and manage:

1. Investor perceptions

Eighteen percent of pacesetters felt that clients thought banks lacked the investment expertise or breadth of services that other channels offer. Banks need to “overcome the perception by some that a bank is only there for loans and deposits and that wealth management is not a strength of an individual bank,” one respondent said.

Takeaway: Ensure leadership is focused on showcasing the breadth of the bank’s wealth management offerings, and consider partners that can help improve branding and marketing efforts.

2.Internal development and training

Thirty percent of pacesetters felt they needed training to help grow the business, in such areas as increasing share of client assets or how to get referrals. At the same time, nearly a quarter of pacesetters said cultural differences between the banking and wealth management sides of the business were a challenge.

Takeaway: Devoting additional resources to training can help improve capabilities and confidence levels, while optimizing practice management efforts may ease cultural discord and competition between different areas of the bank.

3.Streamlining platforms

Twenty-three percent of pacesetters said they had isolated and competing platforms across banking functions.

Takeaway: Banks can benefit from one view of all existing relationships, and reduce inefficiencies with a robust platform that can integrate accounts from brokerage to wealth management.

4.Wealth management expertise

Forty-five percent of pacesetters said they found it challenging to increase the number of advisors/wealth managers, which was critical to their growth.

Takeaway: In addition to focusing on recruiting efforts, banks may want to consider leveraging an RIA to demonstrate wealth management expertise and expand resources.

5.Keeping up with technology

Fifty-eight percent of Pacesetters said keeping up with technology was a challenge, as it was for all banks surveyed.

Takeaway: Banks can leverage the scale of outside firms to keep up with ever-changing technology.

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